Election campaign centres on interest rates

The World Today - Thursday, 8 November , 2007 12:14:00

Reporter: Chris Uhlmann

ELEANOR HALL: To the election campaign now, and interest rates are the main topic of debate today with more than a little airbrushing of history going on as both sides try to take advantage of yesterday's rate rise.

The Coalition is arguing that a Labor government means higher interest rates but its history lesson fails to mention that the Fraser Government would have held the record and only spared itself the indignity by capping home loan rates at 13.5 per cent.

The Labor Party argues it will tackle the inflation that drives rates by investing in skills and infrastructure and yet it is also trying to run as close to the Government as it can on fiscal policy.

In Canberra, chief political correspondent Chris Uhlmann reports.

CHRIS UHLMANN: You've really got to worry about the education system when schoolgirls yell this at the Prime Minister.

SCHOOLGIRL: Mr President!

CHRIS UHLMANN: Maybe that's why both parties believe they can skate over some serious questions about their record on rates, and their plans for the future. After yesterday's rate hike, the Liberal Party released an advertisement, castigating Labor's record.

ADVERTISEMENT: Under the Whitlam Labor Government, interest rates hit 10 per cent. Under the Hawke Labor Government, interest rates hit 17 per cent. Under the Keating Labor Government, interest rates hit 12 per cent. In fact, over the last 35 years, interest rates have risen to over 10 per cent under every single Labor government.

FRAN KELLY: There is a government in the middle there that wasn't featured in your ad, that's the Fraser Government, the Liberal government, when rates hit 22 per cent. Why isn't that mentioned?

PETER COSTELLO: Well, can I make the point because Kevin Rudd falsely says this all the time, that home rates hit 22 per cent under the Fraser Government, that's false.

FRAN KELLY: They didn't hit that?

PETER COSTELLO: No, they didn't.

FRAN KELLY: What did they hit?

PETER COSTELLO: The highest they were ever was 13.5 per cent.

CHRIS UHLMANN: The Treasurer's right, but he leaves out an important point. The Fraser Government had an unfair advantage. It regulated home loan interest rates, capping them at 13.5 per cent. Once they hit that point, the law said they could go down, but not up.

The market rate for cash went to 22 per cent, and home loans would have followed, but for the government fiat forbidding it. Of course, when a loan costs a bank more than they can make on it, they become hard to get, and that's exactly what happened. At the time, homebuyers had to get what were called cocktail loans, where they combined a standard mortgage with a personal loan. The Hawke Government deregulated home loans in 1986. Shadow Treasurer, Wayne Swan.

WAYNE SWAN: No, Peter Costello is deliberately misleading.

FRAN KELLY: What is your…

WAYNE SWAN: They hit 22 per cent under John Howard in 1982. That is the equivalent of the cash rate now, that is the highest they've ever hit, that is John Howard's record.

CHRIS UHLMANN: The other points worth noting in the great interest rate debate are that fundamentally both major parties have identical economic policies, and that no Federal Government can control many of the factors driving inflation.

(to John Howard)

Surely, in the end, what it shows is that the emperor has no clothes, that you have no real control over the tracking of inflation or what happens to interest rates.

JOHN HOWARD: No, I think you do have a control over some of the inflationary pressures. You can't control world oil prices, and you can't control the impact of the drought on grocery prices, but you can control whether you have a budget surplus or a budget deficit. And the only government, and the only side of politics that's got its hand up now for budget surpluses is the Coalition.

CHRIS UHLMANN: But Opposition leader, Kevin Rudd, does have his hand up for budget surpluses.

(to Kevin Rudd)

You can't both claim to be doing economic business as usual, by being an economic conservative and to have a magic bullet on inflation yourself, can you?

KEVIN RUDD: Well when you're dealing with inflation, you've got to deal with the range of policy instruments which are available to you. One of those is to maintain budget surpluses, the second of course is to observe and continue to support the independence of the Reserve Bank, but beyond that, to act on the warnings which Mr Howard's government been delivered for years now on capacity constraints within the economy, on skills and on infrastructure.

You ask what the difference therefore would be under us, it's a whole question of what you then do through the budget, in providing proper resources to fund adequate skills formation in the economy, and on top of that, to deal with infrastructure bottlenecks while at the same time maintaining budget surpluses.

CHRIS UHLMANN: The real difference between the parties is their approach to the labour market. This is where the fight over economic management inevitably leads, because there's simply so little splitting them on the fundamentals. Labor's fight has always been to convince the electorate that its industrial relations policy will not damage the economy, and the Government will be doing everything in its power to argue that it will.